The Pitfalls of Bad Credit

Having bad credit can make you feel like a second-class citizen.

Once your credit rating dips low enough, it's easy to get trapped in a world of costly financial snubs and crummy options.

When you have lousy credit, just about everything in your financial life will cost you more, a lot more than folks with unblemished credit. And that's when you're not being turned down flat for everything from a credit card to a bank account to a car loan.

Here's how having bad credit can transform even the simplest financial transactions into an inconvenient, expensive, and time-consuming experience.

Opening a bank account. Once your credit gets damaged enough, many banks and credit unions will turn you down when you attempt to open a bank account. So a free checking account with a handy ATM debit card is not for you. Easy-as-can-be online banking and bill payments are not for you.

You'll have to make do with costly check cashing centers for cashing paychecks and paying bills via money orders. Many check cashers charge a 2 to 5 percent fee, based on the value of the check. So if you were cashing a $500 check, you'd be charged a $10 to $25 fee. That's a lot of money to spend to get to the money that you've earned in a paycheck.

Paying bills without a bank account isn't cheap either. A money order can cost anywhere from $.50 to $1.50; while these fees may seem nominal, they can add up pretty fast. Paying five bills per month via money orders could cost you as much as $7.50 a month.

Paying your bills in cash is another option, but that can take up a whole lot of time since you'll need to pay each bill in person. Folks with bank accounts can pay bills in seconds. For folks without bank accounts who pay in cash, it can take hours.

Applying for a job. Bad credit can hinder employment options. With your permission, a potential employer may review your credit report when you apply for a job. And if they see any major negative records they may decide not to hire you. If an employer decides to take "adverse action" based on information in your credit report, the company must notify you first and provide you with a copy of your credit report.

Applying for a car loan. As with any loan, your credit affects the interest rate that you pay on an auto loan. Most auto lenders don't bother to scrutinize your full credit report. Instead they base your interest rate on your credit score and on some basic information on your application. Folks with damaged credit could be turned down for a loan or be forced to pay an exorbitant interest rate on even a small loan. For many folks with damaged credit, buying a car means paying cash.

Purchasing auto insurance. More than 90 percent of auto insurance companies use credit data when determining insurance rates and terms for customers. People with flawed credit may have a hard time finding an auto insurer who will take on their business. And even then, they may be shocked at the sky-high auto insurance premiums they are asked to pay.

Choosing an apartment. Landlords and rental agencies often pull a copy of your credit report as a part of the review process. They also may check to see that the employer listed in a credit report matches the employer that you listed on your rental application. They also are looking for any major negative records. People with credit problems may be turned down as a tenant, be asked to make a higher deposit, or be asked to pay a higher rent.

Signing up for utilities. Even the simple act of signing up for utilities after you move into an apartment could cost you more when you have bad credit. With your permission, electricity, cable and other utility companies may check your credit report when determining your rates. If you've got credit problems, you may have to put down a deposit, add a co-signer, or pay higher rates for your utilities.

Choosing a cell phone. Even a cell phone company may treat you differently when your credit is less than stellar. All cell phone companies check your credit score before granting you a service contract. If you've got banged-up credit, you may have to pay extra for a service plan or put down a big down payment.

Applying for a credit card. All those credit card offers promising zero-percent introductory rates and rich cash back rebates and other rewards are reserved for folks with good credit. Apply for a low-rate, low-fee unsecured credit card when you have lousy credit and you'll be turned down.

There are plenty of unsecured credit card offers reserved for folks with no credit or banged-up credit, but these cards come with some pretty serious fees including hefty sign up fees of $100 to $200 and annual fees of $48 or more. And some cards also charge monthly participation fees and program fees. You'll pay all these fees for a credit card with an interest rate in the high teens and a low credit line. That's not much of a deal.

A secured card may be a better option for folks with bad credit who are in need of a credit card. With a secured card, you make a cash deposit into a savings account to "secure" your card's credit limit. The minimum starting deposit is typically $300. Making a $300 deposit gets you a $300 credit limit. Whatever dollar amount you make as a deposit remains untouched in a savings account, earning interest.

After six to twelve months of responsible payments with the card, which will be reported to all the major credit bureaus, you'll be ready to move up to an unsecured credit card and your deposit will be returned to you. And because you've boosted your credit, you'll be eligible for better credit card deals with lower rates and fees. Be sure to choose wisely.

Living with bad credit can be a frustrating and expensive experience. To transform your financial options, you must first transform your credit. That means getting in the habit of paying all your bills on-time each and every month and slowly building up a solid payment history., Your credit will improve little by little, and so will your financial choices.